Research On The Formation Mechanismof RMB Exchange Rate Based On A Currency Basket

Since China joined the World Trade Organization in 2001, China has been related with other countries more closely so that the RMB exchange rate aroused wide attention. Especially in the last few years, lots of countries break out financial crisis. People pay more attention to the stability of the currency. The choice of currency stability mechanism is the question about the choice of exchange rate formation mechanism in nature. At present, with the economic integration in higher degree, it is very significant for the country and even the whole world that a country how to chooses and adjusts of exchange rate mechanism. Therefore, to choose proper exchange rate regime, carry out the appropriate exchange rate policy, which has become an important issue of macroeconomic management today. This paper in order that the RMB exchange rate formation mechanism play a role in strengthen the basic role of the market and promoting the economic development, by researching the RMB exchange rate formation mechanism based on a basket of currencies and learning the real exchange rate formation mechanism at the present stage.This article summarized the theoretical and empirical research results of domestic and foreign scholars in this field from two aspects, which is the process of exchange rate formation mechanism and the choice of RMB exchange rate formation mechanism in China. Then introduced the related theory of exchange rate determination, intervention in foreign exchange market by the central bank and the basket currency exchange rate. Based on the analysis of the RMB exchange rate against the U.S. dollar at the middle price, the opening and the closing price from 2006 to 2014, this paper found that the RMB exchange rate has three characteristics. Besides, the paper proposed two hypotheses, the central bank intervenes the foreign exchange market by adjusting the RMB rate middle price, and our exchange rate system is still the dollar pegged. Secondly, this paper established a TARCH model of the central bank intervening RMB exchange fluctuations based on the characteristic of the volatility of the RMB exchange rate. It is concluded that "leverage effect" caused by the RMB exchange rate fluctuations in each stage by empirical analysis of the RMB exchange rate fluctuations. And analyzed the linkage between the central bank and the fluctuation of RMB exchange rate, which obtained the empirical results of the TARCH model in each stage fluctuation after the reform of RMB exchange rate. Finally, the model, which is the basket currency model and the modified basket currency model, estimated the weight of the basket currency. Due to the uncertainty of the currencies in the basket currency, so this paper selected several country’s currencies which have economic come-and–go closely to estimate. Firstly, to use basket currency estimation method that Frankel used, and took the Swiss franc as the intermediate measurement criteria. Then, by considering the reality of our country, this paper used the bilateral trade weighted method to revise the model coefficient, and analyze the trade factor in the basket currency model. At last, compared with the two models’ estimation results, it obtained the real mechanism of RMB exchange rate and the policy recommendations for the reform of the exchange rate formation mechanism are proposed.